Wage Determination, Profit Sharing and Payment-by-Results Plans

A packer in a Pune plant is paid by the day. A clerk at a bank branch is paid by the month. Both hear the words "minimum wage", and a union leader asks for a "living wage". The terms sound alike, but each marks a different level of pay.

Indian pay debates use three wage concepts, drawn from the report of the Committee on Fair Wages of the late 1940s. They form a ladder, and each step is higher than the one before.

A fair wage depends on four things: the productivity of labour, the rates paid in the same or nearby places, the level and sharing of national income, and the industry's place in the economy.

What moves the wage a firm actually pays. The three concepts say what a wage should be. In practice an employer weighs eight things.

• Ability to pay. Profitable firms can pay more; loss-making firms cannot.
• Supply of and demand for labour. Scarce skills cost more.
• The prevailing rate. Firms follow the going rate in their industry and area, to hold on to staff and to attract new ones.
• Cost of living. Pay is adjusted for price rises. Dearness allowance does this in India, and an escalator clause in a contract does it automatically.
• The living-wage idea. Employers prefer to pay for contribution, not need, and a family budget is open to argument.
• Productivity. Output per worker-hour reflects machines, methods and management, not effort alone.
• Union bargaining power. Generally, the stronger the union, the higher the wage.
• Job requirements. Harder jobs pay more. Job evaluation ranks them (see Job Analysis, Evaluation and Design).

Don't confuse the wage concepts with the wage theories. The three concepts say what a wage ought to cover and are used in law and in awards. The theories, in the next concept, try to explain what actually sets wages. Note too that a theory's "subsistence wage" is not the "minimum wage": the minimum wage also covers efficiency, some education and medical care.

Where it breaks. Costing "needs" is a judgement. Which needs count, and for how many dependants? Capacity to pay is also disputed, since employers and unions read the same accounts differently. A higher floor helps those who keep their jobs, but a floor above what a small firm can pay may cost jobs or push work out of the formal sector. Economists debate how much.

In India. The Code on Wages, 2019 came into force on 21 November 2025 with the other labour codes. It consolidates four older laws, on payment of wages, minimum wages, payment of bonus and equal remuneration. Older exam questions still use those Acts' names. In concept, the law fixes a minimum wage that must be paid, and the Code adds a floor wage as a base below which minimum wages are not set. Rates change, so this chapter gives none.

For exams. Remember the order: minimum, fair, living. The fair wage lies between them, and its upper limit is the industry's capacity to pay.

A union asks for a 10 per cent rise. The employer says the firm cannot afford it. An economist says pay should follow output per worker. Each of the three is using a different theory of what sets wages.

The theories were built at different times, on different assumptions. Seven are taught, and each captures a part of the truth.

Four of them in numbers. These are illustrations.

• Wage fund. A fund of ₹60 lakh a month pays 300 workers: ₹20,000 each. If 400 workers share the same fund, the average falls to ₹15,000.
• Residual claimant. Output is worth ₹10 crore. Rent takes ₹1 crore, interest ₹1.5 crore and profit ₹2 crore. Wages are what remains: 10 − (1 + 1.5 + 2) = ₹5.5 crore.
• Surplus value. A worker adds ₹1,600 of new value in an 8-hour day, or ₹200 an hour. A wage of ₹600 replaces 3 hours of that value. The other 5 hours, worth ₹1,000, are surplus.
• Marginal productivity. A tailoring unit can add tailors, but each extra tailor adds less output than the one before. Values of the extra output are shown below.

At a wage of ₹600 the unit hires four tailors, since the fourth adds ₹650. Together they bring in 1,500 + 1,100 + 800 + 650 = ₹4,050 and cost 4 × 600 = ₹2,400. If the going wage fell to ₹480, the fifth, who adds ₹500, would be worth hiring too.

Don't confuse the iron law of wages with Ricardo's own words. Ricardo wrote of the "natural price of labour". The name "iron law of wages" was popularised later by the German socialist Ferdinand Lassalle for the same idea. Exam papers often attach the name to Ricardo, so know both.

Don't confuse the wage fund with the residual claimant. In the wage fund theory the wage bill is fixed first and then divided. In the residual claimant theory the wage is what is left after the other factors are paid.

Where it breaks. No single theory explains wages. Subsistence and wage fund describe a poor economy with plentiful labour. Marginal productivity describes what a competitive employer will pay. Bargaining and behavioural theories describe the human side. In practice, market rates and productivity set a range, and bargaining and fairness decide where in it a wage lands. The law of minimum wages then sets a floor that no theory can push below.

For exams. Match each theory to its name. Ricardo goes with subsistence, Mill with the wage fund, Marx with surplus value and Walker with the residual claimant. Clark and Wicksteed go with marginal productivity, Davidson with bargaining, and Jaques with the behavioural view.

An auto-parts firm in Pune has a very good year. The machinists who worked hard see nothing extra. In a poor year their pay would not fall either. Profit sharing ties part of pay to the firm's results, by a rule agreed in advance.

Three features matter. The payment is in addition to regular wages. The share is a definite percentage of profit, so it bears a fixed relationship to profit. And the rule is agreed on a continuing basis. A profit-linked payment that the employer decides afresh each year does not count.

A worked example. As an illustration, the Pune firm agrees that 10 per cent of each year's profit goes to employees. The yearly wage bill is ₹2 crore.

• Good year. Profit is ₹80 lakh. The pool is 10% of 80 lakh = ₹8 lakh, which is 4% of the ₹2 crore wage bill. An operator earning ₹3 lakh a year receives 4% of ₹3 lakh = ₹12,000.
• Poor year. Profit is ₹30 lakh. The pool is ₹3 lakh, or 1.5% of wages. The same operator receives ₹4,500.
• Loss. There is no pool. Regular wages are untouched.

How profit is paid out. There are three forms.

Bases of distribution. The pool must also be divided. Common bases are years of service, a fixed percentage of each person's wages in the period (the basis used in the example), merit rating, attendance, performance record, and general record. A firm may mix two or more.

How it differs from a bonus.

Don't confuse profit sharing with ownership, or with statutory bonus. Profit sharing paid in cash gives no ownership; only the share form does. Bonus required by law, which in India is partly linked to an establishment's profit but carries a minimum payable even without profit, follows rules set by the law, not by an agreement. The Code on Wages, 2019 now carries those rules, and older exam papers use the name Payment of Bonus Act, 1965.

Where it breaks. In a large firm, one machinist's effort barely moves profit, so the link between effort and reward is weak and some may ride on others. Profit also depends on prices, demand and management decisions that workers do not control. In a poor year there is no payout, which can sour the mood. Workers may also doubt how profit is calculated, so honest, open accounts matter. Unions sometimes fear that profit sharing will be used to avoid a wage rise.

In practice. Profit sharing works best as a supplement to fair regular wages and other incentives, never as a replacement. Its main gains are a sense of shared interest, more cooperation and, in some firms, lower turnover. For the employer, part of the labour cost then moves with profit.

For exams. Know the definition, the three features, the forms (cash, shares, deferred), the bases of distribution, and the difference from a bonus.

Two machinists in the Pune plant differ by one piece in a day: 39 against 40. Under Taylor's plan their pay differs by ₹440. How sharp such a jump should be is the main design choice in a piece-rate plan.

Individual plans are either time-based, paying a bonus for time saved against a standard time, or piece-based, paying for each unit made against a standard output. The Halsey, Rowan, Emerson and Gantt plans are worked in Compensation Management. Here are three more.

Taylor and Merrick side by side. Taylor's rule is explained in Management: Concept, Principles, Roles and Skills (Unit 1), so take it as given. As an illustration, the plant sets a standard of 40 pieces a day. Taylor's plan pays ₹50 a piece, on every piece, at or above the standard and ₹40 below it. Merrick's plan takes ₹40 as the basic rate, so the middle rate is 110% of 40 = ₹44 and the top rate is 120% of 40 = ₹48. At 83% of standard a worker has made 33.2 pieces, so 34 pieces is the first whole-number output in the middle band.

Taylor's jump from 39 to 40 pieces is ₹440, a rise of about 28 per cent. Merrick's two jumps are ₹176 (33 to 34 pieces, about 13 per cent) and ₹208 (40 to 41 pieces, about 12 per cent). So Merrick softens the cliff and rewards the worker who is nearly at standard. But every worker below 83% earns the same rate, whether at 20% or at 82%.

The Bedaux plan. Charles Bedaux fixed standard times by work study and counted them in B points. In the textbook account, one B is a minute of work at normal pace, including an allowance for rest, so 60 B's make a standard hour. The worker is paid for the hours actually taken, plus 75% of the value of the time saved. The other 25% is described as going to the foreman.

Here T is the time taken, S the standard time and R the hourly rate. Take S = 360 B's (6 hours), T = 5 hours and R = ₹10.

• Time wage: 5 × 10 = ₹50.
• Time saved: 360 − 300 = 60 B's, which is 1 hour. Its value is 1 × 10 = ₹10.
• Worker's share: 75% × 10 = ₹7.50.
• Earnings: 50 + 7.50 = ₹57.50. A worker who takes 7 hours is still paid 7 × 10 = ₹70, with no penalty.

Don't confuse Bedaux with Halsey, and don't start from standard time. Bedaux has the same shape as Halsey's plan, but the worker's share is 75%, not 50%, and the standard is counted in B points. A common slip is to pay for the standard time (6 × 10 = ₹60) and then add the bonus, giving ₹67.50. That pays the saved hour twice. The base is always the time actually taken.

Where it breaks. Taylor's plan has no guaranteed wage and a sharp jump at the standard, which creates stress and treats workers as machines. Merrick's plan is gentler but still pays the same low rate to all who fall below 83%. Bedaux points are complicated, and workers who cannot check the calculation may suspect it, which invites disputes. All three depend on a fair standard, set by work study. Quality and safety need inspection when pay rewards speed.

For exams. Know the rates of Merrick's plan (basic, 110%, 120%, with the 83% and 100% cut-offs), that Taylor and Merrick give no guaranteed wage, and the Bedaux formula with its 75% share.

On a bottling line no single worker makes the output; the line does. Individual standards cannot be set, so the bonus has to follow the group's result.

Three group plans are taught. They differ in what the group's result is measured by.

Priestman, worked. As an illustration, a plant's standard is 2,000 units a month and it makes 2,300. The increase is 300 ÷ 2,000 × 100 = 15%. Each worker's bonus is 15% of wages. A worker on ₹20,000 a month receives 15% × 20,000 = ₹3,000. If the plant makes 1,900 units, there is no bonus.

Scanlon, worked. As an illustration, the norm is that labour cost equals 30% of the sales value of output. In a month the sales value is ₹1 crore, so the allowed labour cost is 30% × 1 crore = ₹30 lakh. Actual labour cost is ₹27 lakh, a saving of ₹3 lakh. With a 75:25 split in favour of employees, they receive ₹2.25 lakh and the company keeps ₹75,000. Shared equally among 150 employees, that is ₹1,500 each. A saving can come from fewer mistakes and less waste, not only from higher output.

Don't confuse Priestman's plan with Scanlon's. Priestman's plan looks at output against a standard. The Scanlon plan looks at labour cost against sales value, and relies on employees' suggestions. It is not simply "1 per cent bonus for 1 per cent more output".

Where it breaks. A group bonus weakens the link between one person's effort and their pay, so some may ride on others. This is the social loafing described in Group Behaviour, Teams and Leadership. Pressure from co-workers can offset it, but also breed resentment. The Scanlon ratio shifts if prices or the product mix change, so the norm has to be reviewed. Both plans depend on trust, and on figures that employees can see and check.

In practice. Choose an individual plan when each person's output can be measured and the work is separate. Choose a group plan when the work is a chain and cooperation matters more than speed at one station. Group plans also suit firms that want to invite ideas on how to cut waste.

For exams. Match each group plan to its measure: Priestman to output, Scanlon to the labour-cost ratio with employee suggestions, and profit sharing to profit.